Court Answers Key Questions About Fluctuating Workweek Overtime Method

Court Answers Key Questions About Fluctuating Workweek Overtime Method

The fluctuating workweek method of calculating overtime has been on the books for decades. The Supreme Court first approved the method in 1942, shortly after the Fair Labor Standards Act (FLSA) was enacted [Overnight Motor Transp. Co. v. Missel, 316 U.S. 572 (1942)]. Moreover, Department of Labor regulations interpreting the fluctuating workweek method were issued in 1968—a half century ago [ 29 C.F.R. §778.114]. Nonetheless, the fluctuating workweek method continues to confound and confuse both employers and employees—and to spark considerable litigation.

New case in point. Danyell Thomas and her co-workers were employed as department managers by Bed Bath and Beyond, Inc. (BBB). During the time at issue in the case, BBB paid its department managers using the fluctuating workweek method.

When they were hired or promoted to department manager, the employees received several documents explaining their compensation and BBB’s method for computing overtime. Each employee received a Department Manager Acknowledgement form that stated in part:

“I understand that my base weekly salary is compensation for all hours I work in a week. I will get paid this base salary for each week I work, whether or not I work 40 hours in a week…I further understand that I will be scheduled for no less than 47 hours per week, but that my actual hours will fluctuate depending on the needs of my store.”

Each employee also received documents setting out his or her base salary and explaining that the dollar value for hours over 40 would vary due to BBB’s use of the fluctuating workweek method. In addition, department managers received an annual notice and acknowledgement of their pay rates and pay stubs for each pay period setting forth their pay.

Despite these acknowledgements and disclosures, the department managers filed a lawsuit claiming that BBB had improperly used the fluctuating workweek method in determining their overtime compensation.

The fluctuating workweek method. Under the general FLSA rules, an employer must pay overtime at one-and-one-half times an employee’s regular rate for every hour worked over 40 hours in a given workweek [29 U.S.C. §207(a)(1)]. For an employee who is paid a regular hourly wage, calculating overtime is simple. The employee’s regular rate is the hourly rate, and the employer must pay one-and-one-half times that amount for each hour worked over 40. So, for example if an employee’s hourly rate is $10, the employer must pay $15 per hour for each overtime hour.

The same calculations apply if the employee is paid a weekly salary rather than an hourly wage. The employee’s regular rate is computed by dividing the weekly salary by 40, with overtime payable at one-and-one-half times that rate. So, for example, if an employee’s weekly salary is $1,200 for a 40-hour workweek, the employee’s regular rate is $30 ($1,200/40)—and the employee’s rate for each overtime hour is $45 ($30 x 1.5). If the employee works 50 hours, the employer must pay the employee a total of $1,650 ($30 x 40 hours plus $45 x 10 hours).

On the other hand, if the employer uses the fluctuating workweek method, the employee’s salary is deemed to cover straight time pay for all hours worked in the week, including overtime hours. Therefore, the employer is required to pay only an overtime premium of one-half the regular rate to satisfy wage-hour requirements. So, for example, if an employee’s weekly salary is $1,200 for all hours worked in the week and the employee puts in 50 hours, the regular rate is $24 ($1,200/50), and the employer must pay an additional $12 for each hour worked over 40. Thus the employer will owe the employee just $1,320 for the week—the employee’s regular $1,200 salary plus $120 in overtime ($12 x 10 hours).

An employer must satisfy five key requirements to use the fluctuating workweek method:

1. The employee’s hours must fluctuate from week to week.

2. The employee must receive a fixed weekly salary that remains the same regardless of the number of hours that the employee works during the week.

3. The fixed salary must be sufficient to provide compensation at a regular rate not less than the minimum wage.

4. The employer and employee must have a clear mutual understanding that the employer will pay the fixed salary regardless of the number of hours worked.

5. The employee must receive a 50% overtime premium in addition to the fixed weekly salary for all hours worked over 40 in a week.

In the case before the court, there was no question that BBB satisfied requirements #3 and #5. The parties conceded that the department managers’ weekly salaries met the minimum wage requirement. Moreover, there was no dispute that the managers’ received a sufficient overtime premium for hours worked over 40 in a given week.

In fact, it appears that BBB paid more overtime than was required under the fluctuating workweek method. For example, one employee’s paystub showed that he had worked 47 hours in a week when his base salary was $1,034.22. To calculate overtime, BBB divided his base salary by 47 to arrive at an hourly rate of $21.79 per hour. However, instead of paying the employee one-half of that amount for each overtime hour, BBB paid the full hourly rate for each overtime hour—or a total overtime premium of $152.53 ($21.79 x 7).

Nonetheless, the department managers claimed that some key questions remained as to whether BBB had satisfied the other requirements for using the fluctuating workweek method.

Key Question #1: Do a few pay deductions violate the fixed salary requirement? The employees claimed that BBB did not meet the fixed weekly salary requirement because it docked the pay of a few employees on a few occasions. The court dismissed most of these pay-docking challenges as inadvertent payroll errors that were properly rectified or as proper deductions for weeks in which an employee was on unpaid leave. According to the court, the record showed only six weeks—out of more than 1,000—in which a department manager was paid less than a full weekly salary—and that was not enough to bar BBB from using the fluctuating workweek method. “Whether measured by raw number or duration, the infractions here, as a matter of law, are far too few and isolated to establish that…[the district managers]…were not paid a fixed weekly salary.”

Key Question #2: Do employees’ hours have to fluctuate above and below 40? The employees claimed that their hours didn’t actually “fluctuate” as required because their hours never or rarely fell below the 40-hour overtime threshold. By contrast, BBB claimed that the employees’ hours did fluctuate from week to week, even though those hours were almost always at or over 40 hours. And, here again, the court sided with the employer. According to the court, the FLSA regulations governing the fluctuating workweek method require merely that employees’ hours vary, not that the hours vary above and below 40 hours per week.

The court acknowledged that this might not be a bargain for employees because the relative loss of pay for a workweek above 40 won’t be offset by full pay for weeks of less than 40 hours. Nonetheless, the court said, “In the end BBB was entitled to design its FWW system within the bounds authorized by DOL’s regulations, and the governing regulations do not require and employment arrangement in which weekly hours necessarily fluctuate above and below 40.”

Key Question #3: Do employees have to understand the fluctuating workweek method? The fluctuating workweek method requires that the employer and employee have a “mutual understanding” that the fixed salary is compensation (apart from overtime) for all hours worked in a workweek. However, according to the court, that doesn’t mean that the employees have to understand how the method works or how overtime will be calculated. While there was evidence that some of the BBB employees did not subjectively understand the compensation scheme, the written notices that they received clearly apprised them that they would be paid a fixed base salary regardless of their hours worked. “Any misapprehension could be, at most, as to the details,” said the court [Thomas v. Bed Bath and Beyond, Inc., No. 16 Civ. 8160 (PAE), (S.D.N.Y., 2/21/2018].

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